Nu Skin Enterprises Investigated By China After Newspaper Probe

Nu Skin Enterprises, Inc. (NYSE:NUS) shares are getting killed in trading for a second consecutive day. On Wednesday, the issue was a report in the Chinese newspaper People’s Daily. Today, it’s the news that the Chinese government is taking that report seriously and has launched an investigation.

Shares of Nu Skin declined as much as 22% today, but its stock wasn’t the only one affected. Shares of competing multi-level marketing companies Herbalife Ltd (NYSE:HLF) and USANA Health Sciences, Inc. (NYSE:USNA) also declined. Herbalife fell as much as 7% on the news, while USANA declined as much as 9% in midday trading.

China matters to Nu Skin, Herbalife

The reason Nu Skin Enterprises, Inc. (NYSE:NUS) shares have fallen so far is because of how important the MLM company has said China is to its business model. Herbalife is in the same boat, as expansion into China has also been one of the company’s goals. Now according to Bloomberg, Chinese officials are launching an investigation into Nu Skin’s operations. Investors could be wondering whether other MLMs will also be investigated by them.

A statement posted on the State Administration for Industry and Commerce’s website said it is taking the allegations made by the People’s Daily serious and has requested that Nu Skin be investigated immediately. Officials said if the allegations turn out to be true, they “will deal with it according to the law and regulations.”

What might be wrong with Nu Skin’s business model

The report in the People’s Daily accused Nu Skin Enterprises, Inc. (NYSE:NUS) of brainwashing people into becoming distributors. The report also said that the company sells 104 products in China, which is 20 more than what China actually allows. Nu Skin claims that the article “contains inaccuracies and exaggerations” which do not represent its business in the country.

Nu Skin has a license for direct sales, according to the Chinese newspaper. In 2012, 20% of the company’s sales were from Hong Kong and China. As of July 2013, the company held the licenses required to run its direct sales network in 19 of China’s 32 different municipalities and provinces.

Analysts are split on their views regarding Nu Skin. Bank of America analyst Olivia Tong told Bloomberg that there doesn’t appear to be enough “tangible evidence” to validate the claims made by the Chinese newspaper. D.A. Davidson analyst Tim Ramey also raves about Herbalife Ltd (NYSE:HLF) and has battled activist investor Bill Ackman, who announced more than a year ago that he was shorting it because he thinks it’s a pyramid scheme—the same argument that has now been leveled against competitor Nu Skin in China.